Revenue Recognition Legislation (IFRS15): A Blessing in Disguise
With IFRS15 just around the corner we thought it would be the perfect time to host our very own breakfast to help with those last minute preparations.
Haven’t heard of IFRS15? You likely will soon with Salesforce’s Regional VP for EMEA describing IFRS15 as the “biggest change in accounting for 15+ years.” Here’s why:
IFRS15 will mean all costs associated with a sale to be accounted for—including sales commission. It also impacts revenue recognition, meaning all revenue will have to be recognised at the point the contract obligation is met.
Carlison Morris, Technical Manager at MHA MacIntyre Hudson used a lovely example: Currently, CarphoneWarehouse can sell a phone on a two-year contract with data, texts and minutes, the revenue is collected on the day it is sold and the sales rep is paid. Nice and easy, right?
But under the new legislation CarphoneWarehouse will have to:
- Recognise the revenue across the two-year period as the minutes, data and text are used, as well as the cost of the phone. This is because the customer could potentially leave the contract at any time.
- This means they have to unbundle each element to work out how much it would cost as a standalone item so the correct revenue can be recognised at the right time.
- Then there’s the sales rep. Their commission will still have to be paid at the time of the deal (no sales person will want to – or should – wait two years to be paid!) and it must be included in the ‘cost of the deal’. This could potentially reap havoc with the balance sheet if you’re paying commission but not technically collecting revenue for another 22 months.
You can read about these changes on the IFRS website. But if you don’t fancy settling down for a few hours going through it with a fine-tooth comb just yet, here’s a bite-size overview of everything you need to know here.
Alongside Carlison Morris and our own IFRS expert Erik Charles, we were joined by Henrique Moniz de Aragão, and Gin Matharu from Salesforce. All spoke about slightly different areas of the legislation, but one thing they did agree on is that awareness of IFRS15 is growing – but not quickly enough! This is worrying as the changes to revenue recognition will impact all businesses. And ultimately legal responsibility sits with the company’s financial director.
Henrique admitted that he found it difficult to fill a room just a few months ago but it’s now much higher up everyone’s list of priorities. So what’s changed?
Download the Executive Summary "Commission Expense Accounting under ASC 606 (IFRS 15)" to learn how to prepare for the new standards.
The creeping fear of a deadline – that’s what’s changed. Financial legislation is constantly changing and there’s always new laws to consider, but those in the room recognised it’s now time to focus on IFRS15.
View It as an Opportunity
Across any industry, legislation is often seen as a burden – with businesses taking vast amounts of time out to educate staff on new regulations and even longer working through the operational changes required to comply. But IFRS15 can be different because it offers every business the opportunity to unpick their service bundles, review the sales commission paid on each deal and review the ROI on each and every sale.
You’ll then be able to ask yourself whether that add-on sale is really with an additional £75 in commission costs. Or if one product would be better removed from a bundle of services. All this information will help the finance department play an even greater role in shaping the strategic direction of the business.